Countdown to an open market

TOM FENNELL June 1 1987

Countdown to an open market

TOM FENNELL June 1 1987

Countdown to an open market


About a dozen agreements have already been signed and scores more are close to being worked out. As the June 30 deadline for the deregulation of the Canadian securities industry nears, Bay Street brokerage executives in Toronto are scrambling to negotiate deals aimed at ensuring the survival of their companies in an industry suddenly dominated by large and powerful international players. As many Canadian firms see it, the solution is to become bigger. In the expansion wars last week Toronto-based Financial Trustco Capital Ltd., a real estate and trust company conglomerate, announced that it was offering to purchase at least 46 per cent of Toronto securities firm Walwyn Inc. for $30 million. At the same time, a long-rumored blockbuster merger of two Canadian brokerage giants, Burns Fry Ltd. and Merrill Lynch Canada Inc., was still being negotiated.

Still, the drive by the Ontario and federal governments to deregulate the financial industry ran into stiff opposition from other provincial governments in Calgary last week. Provincial ministers in charge of financial institutions, meeting to discuss an agreement on deregulation that the Ontario and the federal governments reached on April 27, expressed their displeasure at being left out of the the bilateral negotiations. Three provincial ministers—but not Ontario’s minister of financial institutions, Monte Kwinter—threatened to test the legality of the deregulation because of broad

new powers in the proposed deal that would allow Ottawa to police the securities sector—historically a provincial matter.

But as the provinces organized their opposition, Thomas Hockin, the federal minister of state for finance, was in London promoting the reform proposals at a meeting of the Canada-United Kingdom Chamber of Commerce. He promised that the new regulations contained in Bill C-56—which received second reading on May 7—will also allow foreigners into the Canadian securities industry. The government’s target date for having the new regulations in effect is June 30.

But C-56’s passage promises to be anything but smooth. Elaine McCoy, Alberta’s minister of consumer and corporate affairs, accused the federal government of trying to impose regulations in areas where none were needed. For his part, Pierre Fortier, Quebec’s minister responsible for financial institutions, said that he called for last week’s ministers’ meeting after Ontario and the federal government came to an agreement last month on how to deregulate and police the banks, trust companies and 3 securities industries. S He said that Ottawa 2 and Queen’s Park exI pected the rest of the provinces to quietly fall into line.

But Ontario’s Kwinter said that when his government came to terms with Ottawa in April, he telephoned his counterparts across Canada, and “as far as we were concerned, everything was fine.” But then, when he arrived in Cal-

gary, he said that he was surprised to find his provincial colleagues in an uproar. The Ontario minister said that he refused to go along with demands from the other provinces that he join them in denouncing the federal government. Said Kwinter: “I did not want to imply that Ontario wanted to change the deal.”

The drive to deregulate the Canadian securities industry began in early 1986. The Ontario government, which regulates the Toronto Stock Exchange, Ontario-based securities firms and provincially chartered trust companies, proposed changes that would allow Canadian investment firms operating in Toronto, Canada’s largest capital market, to catch up with rapid and fundamental changes occurring in the international investment community. Worldwide computer links now allow simultaneous listings of companies on exchanges around the world. But it takes huge amounts of capital to participate in the new global game because of the sheer size of the deals done by the much larger capital-rich international firms, and Bay Street’s relatively small firms simply lacked the finances to compete. Some Bay Street executives said that they required both an influx of foreign money and financial backing from Canada’s most powerful financial institutions—the major Canadian banks.

The Ontario government responded to that need by proposing legislation that would allow foreigners to increase their stake in Ontario-based securities firms to 50 per cent after June 30 from the current level of 10 per cent, and to 100 per cent on June 30, 1988. For its part, Ottawa decided to allow the federally chartered banks, as of June 30, to purchase 100-per-cent ownership of a securities firm or to create one of their own. Said Hockin: “Almost any financial institution will be able to offer a full range of services.”

That impending freedom now has Bay Street’s brokers, the chartered banks and, to a lesser degree, foreign firms jockeying for position in the redrawn industry. A well-placed industry source told Maclean's that a decision on the possible Burns FryMerrill Lynch of Canada merger will be announced in two to three weeks. If the deal is secured, it could be the most dramatic move in the battle to date—creating a company with a capital base of more than $170 million.

Toronto-based McLeod Young Weir Ltd. was the first major Canadian firm to position itself solidly for deregulation. Last December the giant U.S. securities firm Shearson Lehman Brothers Inc. of New York, which has held 10 per cent of McLeod since 1982, announced it will increase its interest to 30 per cent after June 30. At the same time, McLeod, led by chairman Austin Taylor, announced that a private holding company owned by Charles Bronfman of Montreal would buy 19.9 per

cent of McLeod’s voting shares. Together the two deals will boost McLeod’s total capital to about $300 million from approximately $90 million.

Since last fall about a dozen smaller

brokers have either merged or been purchased outright by more ambitious rivals. Among the larger deals was Nesbitt Thomson Inc.’s purchase of F.H. Deacon & Co. Ltd. of Toronto for $20 million last September. And in the same month two other mediumsized brokers, Toronto-based Bell Gouinlock Ltd. and Vancouver’s Pemberton Houston Willoughby Ltd., merged. Then, in March Montrealbased Geoffrion Leclerc Inc. became

Quebec’s second largest securities firm when it purchased a second Bay Street broker, Burgess Graham Securities Ltd., for $6.3 million. It had acquired Housser & Co. Ltd. of Toronto last January for $2.5 million.

But the key to establishing Bay Street’s position in the international market may rest with the major banks, with their international networks and their deep pockets. Last fall planners at the Bank of Nova Scotia surprised the banking community by announcing that it would take advantage of looser regulations in Quebec to launch the bank’s own brokerage firm, Scotia Securities Inc. A company spokesman says that the bank now plans to open an office in Toronto in July and expand into other provinces later.

But another anticipated merger failed to materialize when the Canadian Imperial Bank of Commerce (CIBC) officially denied last week that it would join the brokerage firm Dominion Securities Inc. Instead, the bank announced that it would go it alone to create CIBC Securities Inc. The decision represented an apparent change of strategy on the part of Commerce executives, who had argued last fall that banks had to be permitted to acquire 100 per cent of a securities firm if they were to be able to plug into the expanding global network. But CIBC officials said that they now believe that it is far more economical to build a securities operation from within rather than to purchase one outright.

The promise of secure jobs with banks or merged securities firms has produced a hiring stampede in the brokerage business. Henry Cunningham, a respected trader at Gordon Capital Corp., responded to an invitation last November from the CIBC to become a vice-president in its new bond trading department. And Nesbitt Thomson lost vice-president Brian Thibideau last March to the new Canadian office of the powerful New York investment firm Goldman, Sachs & Co., where he became a vice-president. In many cases, top traders who defect then hire colleagues from the firms they have left. Said Cunningham: “If it continues at this pace, some firms are going to lose a lot of their depth and have a hard time keeping market share.” But the prevailing attitude among many executives in the securities industry is that the future belongs to the mighty. And they are making their plans for growth on the assumption that deregulation will proceed, despite provincial objections.